Amazon, Google, and Microsoft have invested billions of dollars in artificial intelligence (AI) startups over the past year, while also charging similar amounts of cloud platform usage fees to these startups.
With these types of transactions, these three major technology companies have become both the biggest supporters and the most direct beneficiaries of these startups, reflecting how a portion of the biggest dividends of the AI craze is continuously flowing to these three most powerful participants. If the relevant start-up companies succeed, the value of the shares held by these technology giants may soar. And if the start-up companies they invest in fail in the end, the money scattered by these technology giants will also be converted into income by then.
These transactions provide relevant startups with the cash needed to train advanced AI models, enabling them to acquire scarce computing power essential for developing and deploying products such as ChatGPT.
The symbiotic relationship between AI startups and these three major technology giants is putting VCs who typically support young companies on the sidelines. These investors rarely make big investments worth billions of dollars, and are more cautious about paying for high valuations corresponding to some large transactions.
In September of this year, Amazon announced a deal to invest no more than $4 billion in Aerospace, a competitor to ChatGPT creator OpenAI. This transaction announcement did not mention another agreement reached by the Seattle giant: according to insiders, Antiopic has promised to spend $4 billion on Amazon Web Services (AWS), Amazon's cloud platform, over the next five years.
According to a report by The Wall Street Journal last week, Google, which had already invested in Aerospace at the beginning of this year, recently agreed to inject up to $2 billion more into the startup. This new commitment was made several months after Anthropic agreed to spend over $3 billion on Google Cloud.
Amazon and Google are both keeping up with Microsoft, which has invested $13 billion in OpenAI. At the same time, OpenAI's spending on Microsoft's cloud business has also reached billions of dollars.
This type of transaction has made the three major technology giants the biggest supporters of these ambitious, money burning AI startups, with support that is unmatched. Microsoft, Google, and Amazon alone have invested nearly $20 billion in Anthropic and OpenAI, of which more than half have been invested this year. Given that the biggest cost for these startups is cloud computing, the majority of the cash invested may flow back into the hands of these investors in the form of cloud revenue.
This type of investment is a great move for these cloud service providers, "said Margaret Jennings, co founder of AI startup Kindo and former employee of OpenAI. The funds invested by these cloud service providers will be rewarded, and now they can directly understand how the research and product teams of these startups develop their own strategies, and can help influence and guide these strategies
Since ChatGPT became popular a year ago, a group of startups have been racing to achieve the next breakthrough in generative AI, which allows software to communicate like humans. Building such technology requires supercomputers equipped with high-end chips, which cost billions of dollars in operating costs. And this is precisely the resource possessed by the three major technology giants, and almost no other company can achieve this.
Four years ago, Microsoft invested $1 billion in OpenAI, pioneering such collaborations with generative AI startups. In exchange, OpenAI agrees to exclusively train its software on Azure servers and release its products through the Azure platform. In January of this year, Microsoft formulated a larger additional investment plan and announced that it would invest $10 billion in OpenAI.
As customers register to use ChatGPT and utilize its underlying technology to build tools, Microsoft also benefits from it. In the recent quarter, Azure's business revenue grew strongly by 29% year-on-year; Microsoft executives stated that spending from AI contributed three percentage points to the growth. Based on the estimated revenue from these businesses, this means that the AI expenditure on Azure is approximately $400 million. Analysts say that most of these expenses come from OpenAI and products developed based on its software.
Venture capitalists who compete with these cloud computing giants have noticed the cyclical nature of these transactions.
Using the balance sheet to potentially artificially exaggerate income is an area of concern for auditors, "said Benchmark venture capitalist Bill Gurley. This is something worth careful scrutiny, "said Benchmark, an early investor at Uber Technologies.
Christopher Armstrong, a professor of accounting at the Stanford University School of Business, said that transactions are allowed as long as they are for legitimate business purposes, not just to increase revenue.
These cloud computing giants have made similar strategic investments in the past, but their scale is not as large as these recent transactions.
The executives of these technology companies say that these investments and cloud computing commitments are achieved by different teams, whose goal is not only to provide funding for a high-spending client, but also to profit from investments.
Kevin Ichhpurani, Vice President of Google Cloud Enterprise, said in an interview in August this year: "These investments must have their own value, that's it." He said that Google's investment and cloud service contracts are different agreements.
Investors involved in the related transactions stated that in addition to their dealings with Antiopic, Google has also entered into a series of similar investment and cloud service contracts with many smaller startups.
The reason why the transaction between OpenAI and Microsoft is unique is because it is the only exclusive transaction - all cloud expenses of OpenAI are conducted on Azure. Other companies such as Antiopic operate on multiple cloud service providers such as AWS and Google.
Google has not reported cloud revenue growth driven by AI like Microsoft. Due to the lower than expected growth rate of Google's cloud business, the stock price of its parent company Alphabet has fallen by more than 10% in the past week. Google Cloud business executives boast of their close relationship with high-value AI startups, betting that over time, these startups will become larger customers.
No one knows whether large AI startups that are currently losing money can become sustainable businesses. But at least temporarily, the valuations of these companies are constantly rising. OpenAI has recently started selling employee equity, with a valuation of over $80 billion based on the sale price, which is more than double its level earlier this year.
Buying at such a high valuation is a problem for venture capital firms attempting to achieve high returns. However, John Somorjai, who is responsible for Salesforce's investment business, said that for a technology company primarily focused on supporting the startup ecosystem, this is not a big problem.
Salesforce is not a cloud computing provider, but it is already one of the most active corporate investors in the field. This seller of customer relationship management software recently won a lead investment deal in Hugging Face, a website that provides AI software, with a valuation of $4.5 billion.
Somorjai said that Salesforce has defeated bids from multiple venture capital firms. He stated that Hugging Face was looking for an investor who could help the company secure new clients. And Salesforce is pleased to have the opportunity to connect its customers with various AI software from Hugging Face.
Somorjai said, "It's great to have substantial returns, but that's not why we invest